Tax Benefits of Buy-to-let SPV’s
As the UK property market develops, savvy investors have increasingly turned to Special Purpose Vehicles (SPVs) for buy-to-let ventures. Not only can this approach provide extra asset protection and tax benefits that could significantly boost their bottom line; but in an age when every penny counts, it has never been more essential that investors understand all of its fiscal benefits when making buy-to-let investments through SPVs.
56% of Brit buy-to-let investors plan to retain their current properties or acquire additional ones, indicating a continued interest in investing. In this guide, we will look at the SPV buy-to-let tax benefits.
What is a Buy-to-Let SPV?
Before we look any further, let's define our terms of "buy-to-let SPV." An SPV (Special Purpose Vehicle) is a limited company established for one specific purpose. In this case, the purpose is owning and managing rental properties. When UK landlords utilise an SPV buy-to-let mortgage, they're using a company structure rather than operating individually through property investments.
Benefits of SPV
Now that we've got a basic understanding of buy-to-let SPV's, let's look at why SPVs are an attractive option for many UK landlords.
1. Lower Tax Rates on Profits
One of the most significant benefits of SPV is lower tax rates on rental income. When using an individual landlord, rental profits face personal income tax. The rates go up to 45% for high earners. But, when using an SPV instead, profits face corporation tax.
As of 2024, the corporation tax rate in the UK stands at 25% for companies with profits exceeding £250,000; those between £50,000 and £250,000 pay a tapered rate, while those making profits under £ 50,000 pay 19%. Therefore, using a buy to let SPV could yield significant tax savings for UK landlords who fall within higher tax brackets.
2. More Generous Mortgage Interest Treatment
Since 2020, individual landlords can't deduct mortgage interest as an expense from their rental income. Instead, they get a tax credit for 20% of their mortgage interest. This change has particularly hit high-rate taxpayers hard.
However, the benefits of buy-to-let still allow landlords with large mortgages to deduct mortgage interest as an expense before calculating their taxable profit—this can bring considerable tax savings for landlords with multiple loans.
3. Flexibility in Profit Extraction
An SPV buy-to-let mortgage allows for more flexibility when it comes to drawing profits from your property business. As the director and shareholder, you have more choices on how you would like to access them - such as dividends, salary, or even both forms combined.
This flexibility lets you structure your income in the best tax-efficient way. For example, taking only up to the tax-free personal allowance might let you maximise tax efficiency. Then, consider taking dividends. They are taxed at lower rates than income.
4. Potential Inheritance Tax Benefits
An SPV buy-to-let may provide inheritance tax advantages to landlords in the UK who are planning for the long-term future of their portfolio. Shares in an SPV company are more easily transferrable among family members than individual properties, reducing estate tax liability through proper planning.
5. Capital Gains Tax Considerations
An SPV structure can provide some tax advantages when selling properties in terms of Capital Gains Tax (CGT). While individuals don't enjoy an annual allowance for CGT payments, companies only pay tax on capital gains instead. These benefits of buy to let prove especially helpful if your plan is to reinvest your proceeds back into more properties instead of withdrawing all the cash directly.
6. Increased Credibility and Simplified Expansion
Though not strictly tax-related, using an SPV buy-to-let can increase your credibility as a landlord while making it simpler to expand your property portfolio. Some lenders provide preferential mortgage rates to SPVs, while raising capital may become simpler if operating as a company.
Notes to Keep in Mind in SPV Buy-to-Let
While using an SPV buy-to-let can offer numerous tax benefits, landlords in the UK should take note of some potential drawbacks:
1. Setup and Running Costs: Establishing and operating a company incurs some extra costs, such as accounting and filing fees.
2. Stamp Duty Land Tax (SDLT): An SDLT liability may arise when transferring existing properties into a buy-to-let SPV.
3. Follow company law: Running a property business through a company is more complex than running it as an individual landlord. You'll need to follow company law and submit annual accounts and tax returns.
4. Mortgage Products Available to SPVs: Although lenders may offer attractive interest rates to SPVs, your selection of products may be more limited than that for individual borrowing.
5. Your Circumstances: The benefits of a buy-to-let SPV may depend on your unique personal circumstances, including other sources of income and the size of your property portfolio.
Conclusion
The SPV buy-to-let mortgage market provides UK landlords with potential tax benefits such as lower tax rates on rental income. However, making an informed decision should involve considering your circumstances.
If you are considering setting up an SPV to invest in property and reap the benefits of SPV, it's wise to seek advice from Taxd. We can guide you through the complexities of property taxation and help determine whether an SPV structure is the appropriate choice for your buy-to-let business.
FAQs
1. What are the key benefits of SPV for buy-to-let properties?
SPVs offer significant tax savings on rental income. Corporation tax (currently 25% for profits over £250,000, with lower rates applicable for smaller profits) can be paid instead of personal income tax rates that can reach as high as 45% for higher earners.
2. Can I still deduct mortgage interest as an expense if I use an SPV?
Yes. SPVs offer several tax savings opportunities over individual landlords by allowing them to claim mortgage interest as an expense before calculating taxable profit, thus potentially providing significant tax reductions.
3. Are there any disadvantages to forming an SPV to own buy-to-let properties?
Yes, potential drawbacks include:
- Establishment and Maintenance Costs: Forming and operating a limited company involves additional expenses, such as incorporation fees, annual accounting costs, and potentially higher legal fees.
- Reduced Mortgage Options: Some lenders may provide fewer mortgage products to SPVs compared to individual borrowers, leading to potentially higher interest rates and fees.
- Complex Profit Extraction: Withdrawing money from a corporation can be more complex than when withdrawing it as an individual landlord, as you may need to pay yourself either salary or dividends, each with different tax repercussions.
- An increase in administrative burden: Running an SPV involves more paperwork and compliance with company regulations, including filing annual accounts and tax returns.
4. How does using an SPV impact Capital Gains Tax when selling properties?
SPVs pay corporation tax instead of Capital Gains Tax when realising capital gains. While this means they do not qualify for an individual CGT allowance, this may prove advantageous when investing proceeds back into more properties.